The Federal Reserve will likely need to keep buying bonds until the end of this year given the still-feeble state of the U.S. labor market, a top Fed official told Reuters on Tuesday.
Atlanta Federal Reserve Bank President Dennis Lockhart, who is seen as a bellwether centrist at the central bank, said in an interview that the economy should benefit from the partial resolution of the so-called "fiscal cliff" budget stand-off earlier this year.
Nonetheless, with the unemployment rate at an elevated 7.9 percent and monthly job growth barely keeping up with the expanding population, Lockhart said a strongly supportive Fed policy would be needed for some time.
"We have a long way to go, particularly in the employment realm, before the economy reaches its full potential," he said. "Therefore, a continuation of this highly accommodative stance that includes the efforts of quantitative easing is appropriate."
In response to the financial crisis and deep recession of 2007-2009, the Fed lowered overnight interest rates effectively to zero and bought more than $2 trillion in Treasury and mortgage securities - a policy know as quantitative easing, or QE - to lower long-term borrowing costs and stoke investment.
The central bank currently is buying $85 billion in bonds per month. It has said it would continue to purchase bonds until it sees a substantial improvement in the labor market outlook.
"I do believe that we're not going to see enough improvement in the very short term to claim victory on the substantial improvement idea, and therefore my recommendation would be to continue (QE) through the end of the second half" of the year, Lockhart said.
Economists are split over whether the central bank will stop buying bonds this year.
A few Fed policymakers have said it may be wise to slow the pace of bond purchases before year-end, with both St. Louis Fed chief Jim Bullard and Cleveland Fed President Sandra Pianalto last week suggesting that stronger job creation could give the central bank an opportunity to taper off purchases.
One official - Kansas City Fed President Esther George - went so far as to dissent against the bond-buying plan at the central bank's last meeting in January.
Fed Chairman Ben Bernanke will likely face questions on when the central bank might pull back on its stimulus in two days of congressional testimony next week. However, Bernanke does not like to front-run decisions by the Fed's policymaking panel.
In the interview, Lockhart, who does not have a vote on monetary policy this year but who regularly participates in the Fed's deliberations, made clear that the bond-buying program, while open-ended, would not be infinite.
He said officials must be mindful of the risks from purchasing assets, but added that the potential costs had yet to come close to outweighing the tangible benefits.
"Our policy has benefited the economy and the improving situation that we're now seeing is at least in part a result of accommodative monetary policy," Lockhart said. "I would not say at this point that in any respect the costs, which are largely long-term and speculative, outweigh the benefits of maintaining a highly accommodative climate."
In particular, Lockhart said he did not currently see any signs the Fed's loose monetary stance was creating bubbles or leading certain markets to overheat. Fed Governor Jeremy Stein recently flagged potential risks in the corporate bond market.
The U.S. economy braked sharply in the fourth quarter and while the pullback was seen as a temporary blip, most analysts do not expect to see much progress whittling down the jobless rate any time soon.
Lockhart said the economy would need to produce more than the recent average of 150,000 jobs per month before the Fed can claim it has made substantial improvement on the jobs outlook.
Still, he said Congress' decision to lessen the blow from the "fiscal cliff" of tax hikes and government spending cuts that was set to hit on Jan. 1 had helped lift some of the uncertainty that had weighed on the recovery.
He said that meant the economy might do better than the 2 percent to 2.5 percent growth he is forecasting for the year.
Lockhart said the biggest threat to growth remained erratic shifts in budget policy from Washington. On March 1, $85 billion in automatic government spending cuts are set to kick in and a temporary bill funding the government expires in late March.
"There are simply a lot of hurdles in this race that we have to get over. Some combination of gridlock could really undermine confidence that seems to be building at the moment," he said.
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